I came to the sad realization today that I was never going to be a great angel investor. And for a simple reason: I like every idea I hear.

Obviously it’s not that my deal flow is so spectacular – the law of averages suggests that I should be getting an equal mix of hits and misses. In fact, since I’m not particularly well connected in the angel investing world (and am still trying to limit the time I spend doing it to a single day a week) I should be getting a considerably worse share of the best deals.

And no, I’m not incapable of saying “No”. I do that all the time. Ask my kids.

The simple reason I like every idea is that I’m an optimist. Not just a run of the mill optimist who sees the glass as half full; I’m an over-the-top optimist. The guy who insists on ordering a whole case of extra glasses to handle the overflow.

In my past life as an entrepreneur, this optimism was a critical tool. I just always believed we would succeed. Even when everyone else said my ideas were ridiculous. Even when we were almost out of money. Even when the metrics were all upside down. I always have confidence that I’ll figure something out. I just have that confidence that things are going to work out fine.

But that’s the problem. I also see that in every other entrepreneur’s idea. It’s even more pathetic because I have enough experience to clearly see the flaws in their reasoning and the gaps in their execution. But then I have that moment where I lean back on the chair, stair into space for second, and say “wait a minute — you know, there just might be a way here”. And pretty soon I’m up at the whiteboard sketching out a possible path to daylight and I’m just as excited as they are.

So far I’ve been incredibly lucky, and every investment that I’ve made has turned out to actually be pretty solid. No crater’s yet. And even a couple that look really promising.

Perhaps one could make the case that because of my operating experience I actually have a better idea than most what constitutes a “doable” idea. Or that my experience as an entrepreneur somehow helps me recognize a fellow optimist when I see one.

Either way, I’m not going to stop doing it. Too much fun. And what can I say? I just have that confidence that things are going to work out fine.

15 Responses to Why Entrepreneurs make Bad Angel investors

in fact, a lot of my investment strategy was devised to work around this “tragic flaw” of my personality… basically, i limit my first check to a small amount, then followup with a bigger 2nd check if it turns out i was right after all.

the challenge is that as an investor, i’m no longer the entrepreneur… even when i see the upside in the business, i can only help advise, i’m not running the show anymore. it’s ultimately up to the business founder to deliver on that optimism and turn vision into reality. that doesn’t mean i’m less optimistic, but it does change how i participate / interact with the team. i still try to provide useful help & resources, but i can’t press my vision onto the founder; they have to discover and find their own way.

still, like you… i like to believe they will be successful. and maybe that’s not a flaw, it’s just a good perspective for someone who wants to help 🙂

Thanks for the comments, Dave. It’s certainly obvious to me that you share the same passion that I do for startups. I’ve concluded that being an optimist is a genetic markers for entrepreneurship; just as having done schoolyard candy arbitrage seems to be.

I’ve developed a slightly different technique for maintaining a bit of distance from my investments. I basically say that if I like a company, I’ll either invest my time or my money – never both. (A quick tip of the hat to Bill Trenchard of ReadyForce who steered me in this direction.).

For the companies I invest time in, I prefer to specifically NOT be an investor in order to be more fully aligned with the founders. This does get a bit tricky when they are out raising their round. I’ve got to fight to bite my tongue and keep my wallet in my pants.

For the companies I do invest money in, I will do the usual phone call here and there, but for the most part I try to leave them on their own. Like you said, it has to be their vision, not mine. Since my model is probably closer to 15 startups (rather than 500) this is working for me so far.

In any event, I really appreciate your thoughts. Hope our paths cross at some point soon. Would love to say hello in person.

1) I always sleep on it. Bad ideas don’t seem so good the next day.
2) If I find that I have better ideas (in my opinion) for the entrepreneur’s business than they do themselves, I pass. I’m disciplined about this. As soon as the words “Hey! You know what you should do?” come out of my mouth, I am no longer a prospective investor. The entrepreneur should have been thinking their idea through 24/7 for months or longer before they show up in your conference room. If you, in a few minutes, think of something they didn’t, they are not someone you should invest in. Like hiring, invest in people that are smarter than you are.

Jerry: I like this approach, but I find that engaging in the “you know what you should do” discussion with the entrepreneur is a great way to truly get a sense of the founder’s strategic sense and how far they have thought things through.

Since I believe the ability to be nimble, change direction, take advantage of opportunites, is so crucial to a startup’s survival, I really want to find entrepreneurs who think this way.

Regardless, it sounds like we both end up in the same place here. If the best ideas on the table at the end of the discussion are mine – it’s not something that I’m going to be an investor in.

Location is definitely a factor and you’ve put your finger on the heart of it. Silicon Valley is an ecosystem of optimism. We never could have started Netflix anywhere else. When we went to rent office space, no one asked to see our (negative) balance sheet, they wanted to hear what we were doing. When we had to lease equipment, they didn’t take cash – they took warrants. Our first legal work? Also done at low prices in exchange for future upside. And all the employees – all were prepared to take incredible risks because they knew possible failure wasn’t a badge of shame, it was a point of pride.

And I was comparing it to other American cities trying to claim the mantle of silicon this, or silicon that. I can’t even imagine how distant the opportunities we have here are to what’s possible to accomplish in Pakistan.

An absolute bullseye. Seeing as 80% or more of angel investors are ex-entrepreneurs, that explains why the median angel loses money. “But this time it’s different, right?” My rule: Fear is our friend. If you can Just Say No, you rarely regret it.

Funny about passing on opportunities. Earlier in my career I was offered multiple jobs and chose to work with on my friends on a startup (which ultimately did OK). I almost had a car accident one day a few years later when I by chance happened to get a stock quote on one of the companies whose job offer I had turned down.

As far as investment, so much of it is chance at these early stages that you have to be in it (at least partly) for the fun of it. It puzzles me to see so many VCs making seed stage investments in order t o have a seat at the table at some future point. The majority of those investments are not going to go anywhere. Curious to see how this strategy plays out for them.